What Is an Irrevocable Trust?

How an Irrevocable Trust Works

An irrevocable trust is a trust that can't be changed or canceled after its creation, at least not without the consent of all beneficiaries or the approval of a court. The trust avoids probate, the legal process required to transfer ownership of assets from a deceased individual to a living beneficiary.

By contrast, revocable trust remains in the possession of the owner, because it can be modified or liquidated at any time. That means the owner has full access to the funds up until the time of their death.

A trust can hold on to the assets and transfer them to your beneficiary weeks, months, or even years after your death. An irrevocable trust's terms never become a matter of public record, because your trust isn't subject to probate. If you simply leave a will, it must be filed with the court to open probate. Anyone can read it.

An irrevocable trust protects assets in case of a lawsuit. You can't take property back after you transfer ownership of it into an irrevocable trust, so your creditors or judgment holders can't reach it, either.

Examples of an Irrevocable Trust

If you create an irrevocable trust for a beneficiary to receive the money after he graduates from college, and you later decide you'd rather have him receive the money when he is 18, you wouldn't be able to change that plan, because the trust couldn't be changed, modified, or amended.

In some instances, you can make changes to your irrevocable trust.

Most states have legal options in place to allow your beneficiaries to undo an irrevocable trust under certain circumstances that you could not have foreseen. This typically requires the unanimous consent of all beneficiaries, and it might not be possible if any of them are minors. They can also ask a court to "decant" the trust, which involves creating a new trust with more up-to-date terms and moving the first trust's property into that one.

You can also write the trust's formation documents to give the appointed trustee power and flexibility to address unforeseen circumstances. For example, a grandparent might designate funds for a grandchild's education, but the grandchild could develop a life-threatening medical condition requiring expensive treatment after the grandparent's death. The trustee might seek a modification allowing funds to cover treatment for the best interest of the child.

Tax Treatment of Property in an Irrevocable Trust

Property transferred into an irrevocable living trust does not contribute to the value of your estate for estate tax purposes. 

Estates valued at more than $11,700,000 in 2021, or more than $12,060,000 in 2022, are subject to a federal estate tax on the balance of their values over this threshold. Under the terms of the Tax Cuts and Jobs Act (TCJA), these exemptions will remain valid after 2025 for contributions made to a trust before that time. The exemption level is scheduled to return to the $5 million range (adjusted for inflation) when the TCJA expires at the end of 2025.

Benefit Treatment

Assets in an irrevocable trust may count against you or a beneficiary for purposes of qualifying for certain government benefits, including Supplemental Security Income. Assets in an irrevocable trust may not be "counted" as your assets by Medicaid, as long as you put the assets into the trust before the "look-back period."

An irrevocable trust can also protect special-needs beneficiaries by allowing them to qualify for government benefits, which they might not be able to do if they were to inherit assets outright.

Types of Irrevocable Trusts

Irrevocable trusts come in several different forms:

Living Trust

Also called an "inter vivos trust," this any trust that's created and funded by an individual during their lifetime.

Testamentary Trust

These trusts are always irrevocable, because they're not created and funded until after their creators' deaths. They're established according to terms contained in the deceased's last will and testament.

Irrevocable Life Insurance Trust (ILIT)

This type of living trust can be set up to accept the death benefits at the time of your death to avoid having their value included in your estate for estate tax purposes.

Charitable Trust

An irrevocable charitable remainder trust pays beneficiaries first, then distributes the balance of your assets to a charity. You can also set it up to work as a charitable lead trust, paying the charity first.

Irrevocable Trust vs. Revocable Trust

Alternatives to an Irrevocable Trust

A revocable trust is one that you can dissolve or amend any time you like if you're still mentally competent, so it doesn't protect against lawsuit liability or estate taxes. You can reclaim the property you place into a revocable trust, so the law considers that you're still the owner. A revocable trust automatically becomes irrevocable at your death, because you're no longer available to change or revoke it.